Tradition vs. Merit in Family Business

An Emiriti entrepreneur (we'll call him Ibrahim) had worked industriously his entire life to provide a valuable business to pass to his sons. Through shrewd trading, adherence to conservative financial management principles and hard work, and aided by an outgoing personality and endless energy, Ibrahim had amassed a network of enterprises that generated many millions of dollars in annual sales. Now in his mid-60's, he faced the challenge of passing the mantel of leadership and the responsibility of ownership of the company to his children.

Two of Ibrahim's nine sons worked in the business with him, each managing a separate company. His eldest son, Salem, ran the smallest of the companies and his second eldest son, Hassan, ran the largest. Salem was a devout Muslim and a mediocre businessman. He was content to run his company so as not to lose anything and to maintain his comfortable lifestyle. Hassan was the opposite, lukewarm in his religious convictions but naturally charming and filled with the fire of commerce.

The traditions of Ibrahim's culture and belief system suggested that he pass the torch of his legacy and leadership to his eldest son. But Ibrahim feared the inertia of Salem's natural complacency would cause him to simply stand still. He would focus his time on merely protecting the torch flame from the gathering winds of competition. Hassan, on the other hand, would carry the torch forward courageously, using his talents and entrepreneurial drive to take the company into new markets, create fresh ideas and earn higher gross margins.

As the sun rose behind me, warming the shoreline air, I remembered why Ibrahim had hired me. He needed someone to help him think through this pending generational transition, identify possible options for dividing responsibility and ownership, analyze those options according to the guiding principles of the family and suggest the best possible solution.

I watched an apparently exhausted sea snake struggle to swim through the constant crash of the small waves near the shoreline and thought of what I would do in his place.

Strategies for Success in Family Business

Families rule the world of business. Their firms make up more than 2 out of 3 companies across the globe and employ over half of the world's industrialized workforce. They produce 65% of the Gross National Product in the United States. Their names are some of the world's most famous brands -- Marriott, Disney, Ford, Nestle, Anheuser Busch, Ferrari, and Levi Strauss.

Family businesses are leaders in their particular industry (think Washington Post, Dell, Johnson & Johnson). When compared to their non-family competitors, they are more than 5% more profitable, achieve higher annual revenue and income growth, provide higher annual shareholder returns and are valued 10% higher by the equities markets. *

Family business leaders are often the best and brightest executives in their industries. They run professional, innovative, aggressive companies that expand the horizons of productivity and efficiency. J. W. Marriott, Jr. for instance, succeeded his father as CEO of the Marriott Company in 1972 when revenues were nearing US $200 million. Today, in the twilight of his career, Bill Jr. leads the US $9 billion, 140,000 employee international company. Under "Junior's" guidance the company grew to 45 times the size of the company his father passed on to him.

Family businesses are also known by many to be a minefield of complex relationships and competing norms. Employee/manager relationships in any company are difficult. Add to the mix a manager who is your father, or aunt, or owner's son, and going to work becomes more complicated. Family norms often run headfirst into the demands of the business. Issues related to fairness between siblings can easily spill over into the workplace, increasing tension and anxiety among employees and family members. The challenge of passing the business to the next generation in a fair and logical manner can cause immense tension and stress.

Based on these challenges then, it is not surprising that 7 out of 10 family businesses fail to make the transition to the second generation. And only 1 of 10 makes it to the third generation. That's a discouraging 60 + % failure rate per generation that leads to a number of perplexing questions.

Why do so few survive the transition from one generation to the next? And when they survive, how is it that family-businesses outperform their non-family competitors? What principles do they follow to help them overcome family business challenges?

Four Principles of Family Business

Based on my research and experience in working with over 55 families from 13 different nations, I believe that adherence to four straightforward and simple principles will benefit any family business system, regardless of its size, industry, generation or location.

Form a Firm Foundation

Forming a firm foundation means answering three questions;

1) What do we believe is important and right?
2) What are our objectives?, and
3) How do we plan to achieve them?

The best organizations make decisions based on what they believe to be important and right. In 1982, seven people in the Chicago area died shortly after taking poisoned Tylenol products. . There remained the possibility that more would perish or be seriously injured if the leaders at Tylenol didn't act fast. Jim Burke, then CEO of Johnson & Johnson who produced the painkiller, made the decision to pull US $150 million of Tylenol from the shelves of drugstores and pharmacies across North America because of a J & J guiding principle that named customers their number one priority.

Family business leaders must identify and prioritize the guiding principles that they want to form the foundation of the family's legacy. Guiding principles are those principles that 1) you want to teach to your children and grandchildren, 2) will be just as important 100 years from now and 3) you would stick to even at your own financial peril. Most importantly, they must be more than just a nice frame and calligraphy. Leaders must create and follow a plan to make them useful to any family member facing an important question. They should provide guidance and inspire excellence in every aspect of life, whether related to the business or not.

Make it a Meritocracy

Seemingly at birth we begin to believe in the "Norm of Equality", which states that our parents should give us gifts, benefits, advantages, opportunities, affection and time in the same allotments as our siblings. The Norm of Equality is deeply ingrained in any sibling, but is completely impossible. No two siblings throughout history have been treated equally, ever. Not even twins. One is born before the other, thereby receiving more time and attention than the second; forever throwing off the balance.

Family business leaders must protect their businesses from inappropriate family intervention by developing a meritocracy; a system that recognizes and rewards achievements rather than birth rights. Whereas equality means treatment based on circumstances, meritocracy means treatment based on results.

If the business is to continue to provide benefits to the quickly expanding family, it must grow and remain profitable. As such, it must hire and keep talented managers and shed family and non-family members alike who are not achieving desired results. So often multi-generation family companies struggle under the weight of a top-heavy organization chart filled with underachieving family members. In an increasingly competitive global economy, no business can afford the risk of burdening itself with the suffocating overhead of fat salaries for inefficient leaders.

Communicate consistently and constantly

Communication in a family business means two things: information sharing and openly discussing important issues. Families are generally terrible in both areas.

Family leaders too often hide important information from other family members, including spouses and children. Some family business leaders withhold financial and business related information associated with estate planning and personal assets because they don't want their children to overestimate their wealth and believe they will never have to work hard. Others, particularly in Latin and Central America, fear that their children could talk too much about their money and thereby put themselves in jeopardy of being kidnapped.

While both are legitimate concerns that warrant careful consideration, secrets and confidentiality breed mistrust in any organization. And high mistrust in a family is a big step towards the edge of the succession planning cliff. Fall off the cliff and find yourself looking down at the jagged rocks of accusation, shareholder conflict, legal disputes and eventual bankruptcy.

Certainly, some information is confidential and should be kept close to the vest, but spouses and children of family business leaders often need information in order to make decisions about their future. Education and career choices, for instance, are often influenced (and rightly so) by the financial situation of the family. "Do I have enough financial security to pursue my dream of teaching disabled children, or do I need to focus on a higher paying career?" is an example.

It is the responsibility of senior family members to identify what information should be shared with children and at what age (I am convinced that children can handle more truth and information than we give them credit for) and then do it! Plan and carry out a one day, quarterly family council meeting that brings the family together to share relevant information and discuss important issues. This will give them the chance to learn about what's going on in the business and allows family members to ask the delicate, potentially combustive questions in a safe and predictable environment. Junior generation members cannot lead this effort because their questions about wealth and succession planning in the family is often misconstrued as greed or impatience.

Put a Process in Place

One of my client families was at an exclusive resort in Thailand the day the tsunami struck. They happened to be there at the same time as a branch of a well-known American business family that had just gone through a terrible, intra-family dispute. As a result of the dispute, some major assets of the family had been sold to pay off a disgruntled shareholder. As my client and a leader of the other family talked about the family business challenge, my client asked the other what would have staved off the crisis. "Some sort of process to get us to work together, communicate better, think through issues together and make decisions together would have kept things together," came his sad reply.

Beginning a process that is designed to protect the well-being of the family, the success of the business and the education of the shareholders group is a logical thing to do. But it's daunting because it means bringing family members together to discuss difficult issues. And the family members who take charge of the process are too easily seen by siblings and cousins and aunts and uncles as having an ulterior motive, though there is rarely any political power associated with starting a coalition to protect the family business. So what's a family to do?

Find and hire someone to help you as a facilitator; someone who is a trusted advisor to the family and is not easily associated with one generation or the other. This person could be an attorney, religious leader, consultant, family friend or distant relative. Explain to them your particular situation and ask them to help you begin a process of understanding future challenges, evaluating options for alleviating them and deciding on a long term plan for guarding and enhancing the family, it's company and the company owners.

Conclusion

In the end, Ibrahim's dilemma was solved to the blessing of the whole family. Together we undertook a process of teaching his children the unique challenges of family business, opening their eyes to the fact that the financial and social benefits they receive from the business are only available to them because it is growing and profitable. We then included them in a family business governance process with the objective of designing a long term plan to protect and enhance what Ibrahim was leaving to them.

Over the course of 9 months we met regularly in workshops, family council meetings and individual work sessions with that goal in mind. And in the end it was not me or Ibrahim who decided that Hassan was his most logical business successor, but Salem, the eldest son, who said "what is best for the business is also best for the family; that I take over as leader of the family and protector of our guiding principles and that Hassan lead the family business, even though he is my younger brother."

Successful family businesses, those that enjoy profitable, growing businesses, educated and committed shareholders and a healthy, balanced family, apply these four time-tested principles. When rightly and correctly integrated into the family and business, they act as a road map, guiding the business and family leaders as they work together to improve the well being of the entire system.